Is Japan’s economy struggling?

Japan has suffered from long-term outright price falls which I call disinflation. An example of this is that she rebased her consumer price index at 100 in 2010 and the latest reading (December 2011) was 99.4. If we look back on this index the annual peak was 102.1 in 2008 and as far back as 2002 the reading was 101. Hopefully you get the idea! This is a very different pattern to other nations.

Also the Bank of Japan uses a core inflation measure which has usually exhibited more disinflation than the headline (it excludes food and energy). It is doing so right now as on a scale of 2010=100 it is at 98.4.

Yen strength

The Japanese Yen has been very strong in recent years and the strength has made life difficult for her exporters as they have become successively less price competitive. If we look at the Yen versus the US Dollar it was at 124 in the summer of 2007 whereas in the autumn of 2011 it tested 75. This feature has exacerbated the disinflation above and meant that the Bank of Japan has made various intervention efforts over time the reults of which may have made its dealers fans of the Borg’s catchphrase. Resistance is futile.

An ageing population

The Japanese have an ageing population and a low birth rate. According to the Ministry of Health the fertility rate is 1.37 which compares with 1.9 in the UK and 2.09 in the USA and 2 in France (interestingly the German fertility rate is low too at 1.38, an exporting link?). With the high level of life expectancy in Japan this means that we are seeing an increasing numbers of retirees in proportion to the workforce. Also the low birth rate has led to an increawsing number of forecasts that Japan’s population will shrink on current trends. Indeed I reported on one before that suggested the population will fall from the current 130 million or so to 50 million at the turn of the next century. There is a lot that may change between now and then of course but it does seem clear that the population looks set to fall.

We can go back to 1899 for live births per 1000 of the population and it was 32 and the latest number is 8.5. Another feature of Japanese life is that illegitimate births are much rarer than abroad being only 2.1%. You can almost see the scorn on the page as the Ministry makes international comparisons!

This ageing population looks likely to collide with a growing national debt about which the International Monetary Fund has published reports saying that it feels the ratio could reach 250% of economi coutput in 2014. The post-tsunami stimulus polices have only exacerbated this issue with Japan continue to run high annual deficits.

Structural disagreement

The Ministry of Finance (politicians) blames the Bank of Japan for her economic problems and the Bank of Japan blames the Ministry of Finance. Lily Allen perhaps summarised each institutions view on the other.

It’s not me, it’s you

Japan’s economy has been struggling

i would like to take you back to March last year when the tsunami hit Japan. I offered then a critique of those who rushed to claim that she would recover quickly and strongly.

'The news media has had various forecasts over the last 48 hours of the scale of the crisis and many of these also try to tell us the scale of this catastrophe and come with a promise of a recovery which is fast. I will leave you with one thought, exactly how do they know that?'

If we come right up to date it is plain from a speech given today by the Governor of the Bank of Japan Mr. Shirakawa that they did not know that. Please read this excerpt remembering that central bankers talk in euphemisms and that in Japan loss of face is important.

'Recently, economic activity has been more or less flat, reflecting downward forces deriving from the effects of a slowdown in overseas economies and the appreciation of the yen as well as upward forces stemming from firm domestic demand, such as in terms of private consumption. Although this state of the economy is expected to continue for the time being — beyond early spring — the economy is expected to return to a moderate recovery path.'

I am often curious about what the phrase “more or less flat” actually means as official bodies are using it more often, but if we move on we see that the most optimistic word here is “moderate”. Unless you believe that one of the features of the “lost decade” has ended and the Japanese are about to consume like they are English or American. Indeed if we look at the latest family income and expenditure numbers they will be making an even more extraordinary effort as incomes are falling.

Income and Expenditures for Workers’ Households

The yearly average of monthly income per household stood at 510,117 yen, down 2.0% in nominal terms and down 1.7% in real terms from the previous year.

The yearly average of monthly consumption expenditures was 308,826 yen, down 3.0% in nominal terms and down 2.7% in real terms from the previous year.

How many places around the world have falling wages/incomes? Karl Marx must be spinning in his grave up at Highgate at quite a rate! Also as this is Japan the fall in real incomes is lower than the nominal fall.